Difference Between AS 11 and Ind AS 21: Foreign Exchange Rates

Updated on
Oct 05,2018 - 07:25:44 AM

Accounting Standard 11 - The standard deals with the issues involved in accounting for foreign currency transactions and foreign operations i.e., to decide which exchange rate to use and how to recognise the financial effects of changes in exchange rates in the financial statements.

A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.

A rate that approximates the actual rate at the date of the transaction is often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is unreliable.

Ind AS 21 The Effects of Changes in Foreign Exchange Rates

An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its financial statements in a foreign currency. The objective of Ind AS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements.

Difference Between AS 11 and Ind AS 21

Ind AS 21 excludes from its scope, forward exchange contracts and other similar financial instruments, which are treated as per with Ind AS 109.

AS 11 does not explicitly states so.

As per Ind AS 21, presentation currency can be different from local currency and it gives detailed guidance in this regard.

Under AS 11, there is no concept of functional currency. It makes reference only to two types of currencies:

Reporting currency: The currency in which the financial statements are presented

Foreign Currency: It is the currency other than reporting currency.

Ind AS 21 states that there can be 3 types of currencies:

Presentation Currency: Currency in which financial statements are presented

Functional Currency: Currency of the primary economic environment, in which the entity operates.

Foreign Currency: It is a currency, other than functional currency.

Hence, if a transaction takes place in foreign currency, then it will be first converted into functional currency, and then, it will be converted into presentation currency (In case functional and presentation currency are different).

Similarly, a transaction in functional currency will have to be converted into presentation currency (In case functional and presentation currency are different)

AS 11 is based on “integral foreign operations” and “non-integral foreign operations” approach for accounting for a foreign operation.

Ind AS 21 Is based on “functional currency approach” for accounting for a foreign operation.

However, in Ind AS 21, the factors to be considered in determining an entity’s functional currency are similar to the indicators in existing AS 11 to identify non-integral foreign operations. As a result, despite the difference in the terminology used, there are no substantive differences in respect of accounting of a foreign operation.

AS 11 contains an option for capitalization/deferral of exchange differences arising on reporting of long-term foreign currency monetary items.

If the exchange difference relate to acquisition of depreciable capital asset, they can be adjusted in the cost of the asset and thereby depreciated over the balance life of asset.

If the exchange difference relate to the acquisition of a non-depreciable capital asset, then it can be accumulated in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortized over the balance period of such long-term asset/ liability, by recognition as income or expense in each of such periods, but not beyond 31st March, 2020.

Ind AS 21 does not permit such optional alternative treatment. Accordingly, the entire exchange difference, arising on reporting of long term foreign currency monetary items has to be debited to P&L Account (Statement of Other Comprehensive Income) only.

However, if an enterprise has an accounting policy of capitalization of exchange differences, arising on reporting of long term foreign currency monetary items, at the time of transition to Ind AS, Ind AS 101 permits the enterprise to continue with such accounting policy.